Govt. bond market suffers worst weekly fall as investors hide behind safe havens

Sri Lanka’s government bond market last week suffered its worst outflow for the year as foreign investors sought to seek refuge in safe haven assets such as United States government securities, as coronavirus outbreak didn’t show signs of receding.  

For the week ended on February 26, foreigners sold net Rs.11.4 billion worth of government securities bringing total foreign holdings to Rs.91.2 billion, the first time such holdings fell below Rs.100 billion since the end of conflict in 2009. 

As the new coronavirus or COVID 19 is spreading across national and regional boundaries faster than expected, investors are globally taking a risk-off mode and parking their funds in safer and more liquid government securities in the US. 

The US government bonds rallied during the week ended on Friday (Feb.28th) as they picked up new momentum after panicked investors sold equities to seek refuge US treasuries. 

As a result, the US treasury yields hit new lows with the 10-year bond touching 1.127 percent, breaking the previous record low close of 1.296 a day earlier. Yields fall when bond prices rise. 
While the recent phenomenon is not limited to Sri Lanka, what is exclusive to the Sri Lankan context are its battered sovereign rating, falling external reserves and the uncertain fiscal trajectory, which have spooked the frontier market investors. 

Frontier market investors, who have holdings in both Sri Lanka’s bonds and stocks, have cited the latter two reasons as most disturbing and caused them to cut their exposure. 

Sri Lanka’s gross official reserves have reduced to US$ 7.5 billion by the end of January 2020, down from US$ 8.9 billion in June-end, 2019, but up from US$ 6.9 billion a year ago.

Meanwhile, the Sri Lankan stocks also continued to shed value during the week ended on February 28, recording a year-to-date loss of Rs.488 billion or US$ 2.7 billion. 

Foreigners were the net sellers during last week for the 9th consecutive week but they purchased a net US$ 3.9 million worth stocks, recording the highest value for the month.